Risk Control

Avoiding losses has always been one of

humanity's greatest concerns, and risk control
was undoubtedly the first risk management
technique.
Broadly defined, risk control encompasses all
techniques aimed at reducing the number of
risks facing the organization or the amount of
loss that can arise from these exposures.
Risk control includes risk avoidance and risk
reduction.
9-1

Risk Avoidance
Technically, avoidance takes place when
decisions are made that prevent a risk from
even coming into existence.
Risks are avoided when the organization
refuses to accept the risk even for an instant.
An example is a firm that considers
manufacturing some product but, because of
the hazards involved elects not to do so.

9-2

Risk Avoidance
While avoidance is the only alternative for
dealing with some risks, it is a negative rather
than a positive approach.
If avoidance is used extensively, the firm may
not be able to achieve its primary objectives.
For this reason, avoidance is, in a sense, the
last resort in dealing with risk. It is used
when there is no other alternative.

9-3

Risk Avoidance
Risk avoidance should be used in those
instances in which the exposure has
catastrophic potential and the risk cannot be
reduced or transferred.
Generally, these conditions will exist in the
case of risks for which both the frequency and
the severity are high.

9-4

Risk Reduction
The term risk reduction is used to define a
broader set of efforts aimed to minimize risk.
Other terms that were formerly used, and
which have been displaced by the more
generic term "risk reduction" include "loss
prevention" and "loss control."
The term " risk reduction" is considered to
include both loss prevention and loss control
efforts.
9-5

Risk Reduction
Broadly speaking, "loss prevention" efforts are
aimed at preventing the occurrence of loss.
In addition, "loss control" efforts can be
directed toward reducing the severity of those
losses that do occur.
In other words, some risk control efforts aim at
reducing frequency, others seek to reduce the
severity of the losses that do occur.

9-6

Historical Neglect of Risk Control

Although the situation has changed with the
growth of risk management, there was a time
when risk control was relatively neglected.
In theory, risk control measures should be used
when they are the most effective technique for
dealing with a particular risk.
Risk control should be used up to the point at
which each dollar spent on such measures
produces a dollar in loss reduction.
9-7

Difficulties in Applying Marginal-Cost

Marginal-Benefit Analysis
Applying marginal-benefit marginal-cost
analysis to the risk control process is
complicated by several factors.
The benefits are in the future and are elusive,
requiring measurement of something that does
not happen (losses).
Given the uncertain nature of the future benefits
from loss reduction and the immediate cost, it is
probably not surprising that the expenses often
lose in competition with other funding needs.
9-8

Government Standards
The theory behind government regulations
related to safety is that businesses will not
implement the desired safety measures
unless they are compelled to do so.
In other cases, legislators have simply
concluded that the public interestdefined in
terms of injuries and deaths prevented
outweigh corporate profits in importance.

9-9

Government Standards
Once adopted, statutory standards become
mandatory for all entities covered by the law.
Occupational Safety and Health Administration
(OSHA) regulations are perhaps the best
example of statutory loss control standards.
OSHA was a legislative recognition of the fact
that businesses must sometimes be compelled
to make loss prevention expenditures.

9-10

OSHA Standards
The law was passed to force employers to incur
loss prevention costs related to employee
safety without regard to marginal benefitmarginal cost analysis.

If the employers could not find justification for

employee safety expenditures on a costbenefit basis, Congress would give them the
incentive to do so by imposing penalties for
failure to do so.
9-11

Voluntary Standards
In addition to government (statutory) standards,
there are also a number of voluntary or
consensual standards.
These are standards that have been adopted by
nongovernment groups to provide private
advisory guidance.
Although not legally binding, voluntary
standards can have an important influence on
the safety efforts of those to whom they are
intended to provide guidance.
9-12

Voluntary Standards
Often, voluntary standards gain significance
because they are used as performance
measures by insurance companies.
The standards promulgated by the Underwriters
Laboratories (UL) are a case in point.

9-13

Facets of Risk Control

A well designed loss prevention and control
program should encompass five major areas:
personnel safety
liability loss control
automobile safety
property protection
security

9-14

Differences in Required Expertise

Many of the techniques used in risk control are
specific to one area or another, and while the
underlying approach may be theoretically the
same, different skills are required.
Preventing employee injuries obviously calls for
different expertise than reducing the risk of a
directors' and officers liability suit, or
preventing embezzlement, but all require a
mixture of technical skills.
9-15

Responsibility for Risk Control

There are many authorities who feel that
responsibility and authority for the development
of a total loss prevention and control program
should be vested in a single person.
The risk manager, by virtue of his or her
familiarity with the exposures of the
organization and the costs arising from such
exposures, is a logical person to whom such
responsibility might be assigned.
9-16

Risk Manager and Risk Control

The risk manager will rarely possess the wide
range of skills required for a comprehensive
loss prevention and control effort.
What he or she really needs is the ability to
recognize the need for risk control and the
managerial skills necessary to accomplish the
desired goal through the efforts of those who
have the needed skills.

9-17

Other Assignments of Responsibility

In those firms in which a Safety Director
already exists, that individual's position might
be enlarged to include responsibility for total
loss prevention, not just personnel safety.
In other firms, where there is no safety
director, responsibility for this function
should be assigned as a part of the total
responsibility to a Director of Loss Prevention
and Control.
9-18

Theories of Accident Causation

There are two major theories concerning
accident causation, each of which has some
explanatory and predictive value.
1. the domino theory developed by H. W.
Heinrich, a safety engineer and pioneer in
the field of industrial accident safety.
2. the energy release theory, developed by Dr.
William Haddon, Jr., of the Insurance
Institute for Highway Safety.
9-19

Heinrich's Domino Theory

According to Heinrich, an "accident" is one
factor in a sequence that may lead to an
injury.
The factors can be visualized as a series of
dominoes standing on edge; when one falls,
the linkage required for a chain reaction is
completed.
Each of the factors is dependent on the
preceding factor.
9-20

Personal Injury

Accidents

Personal or Mechanical Hazard

Faults of Persons

Ancestry or Environment

Heinrichs Domino Theory

9-21

Heinrichs Domino Theory

1. A personal injury (the final domino) occurs
only as a result of an accident.
2. An accident occurs only as a result of a
personal or mechanical hazard.
3. Personal and mechanical hazards exist only
because of the fault of persons.
4. Faults of persons are inherited or acquired as a
result of their environment.
5. The environment is the conditions into which
an individual is born.
9-22

Heinrichs Domino Theory

When there is an injury or property damage,
all five factors are involved.
If the fifth domino falls, it is because the first
domino fell causing the others to fall in turn.
If one of the factors in the sequence leading to
an accident can be removed, the loss can be
prevented.
For example, eliminating an unsafe act makes
the action of the preceding factors ineffective.
9-23

Heinrichs Domino Theory

Heinrich held that a person responsible for
loss control should be interested in all five
factors, but be concerned primarily with
accidents and the proximate causes of those
accidents.
The factor preceding the accident (the unsafe
act or the mechanical or physical hazard)
should receive the most attention.

9-24

What is the Primary Cause of Accidents?

After a study of 75,000 industrial accidents,
Heinrich concluded that 98% of all accidents are
preventable.
88%

of accidents result from unsafe acts of

individuals

10%

of accidents result from dangerous

physical or mechanical conditions.

2%

of accidents result from "Acts of God."

9-25

Accidents, Not Injuries

Heinrich also emphasized that accidents, not
injuries or property damage, should be the point
of attack.
An accident is any unplanned, uncontrolled
event in which the action or reaction of an
object, substance, person, or radiation could
result in personal injury or property damage.
If a person slips and falls, an injury may or may
not result, but an accident has taken place.
9-26

William Haddon's Energy Release Theory

Instead of concentrating on human behavior,
Haddon treats accidents as a physical
engineering problem.
Accidents result when energy that is out of
control puts more stress on a structure
(property or person) than that structure can
tolerate without damage.
Situations in which "energy is out of control"
could include fire losses, accidents, industrial
injuries, and virtually any other situation in
which injury or damage can result.
9-27

Haddons Energy Release Theory

Haddon suggested ten strategies designed either
to suppress conditions that produce accidents or
to enhance conditions that retard accidents.
1. Prevent the creation of the hazard in the first
place.

2. Reduce the amount of the hazard brought

into being.
3. Prevent the release of the hazard that
already exists.
9-28

Haddons Energy Release Theory

4. Modify the rate or spatial distribution of
release of the hazard from its source.
5. Separate in time or space the hazard and what
to be protected.
6. Separate the hazard and what is to be
protected by interposing a material barrier.
7. Modify relevant basic qualities of the hazard.
8. Make what is to be protected more resistant to
damage from the hazard.
9-29

Haddons Energy Release Theory

9.

Begin to counter the damage already done by

the hazard.

10. Stabilize repair and rehabilitate the object of

the damage.
Generally speaking, the larger the amount of
energy generated relative to the resistance
level of the property or persons exposed to
the energy, the lower numbered (the earlier)
the strategy must be employed to control it.
9-30

The Two Theories Compared

The difference between the Heinrich and
Haddon theories can be viewed as a difference
in emphasis.
Both theories explain a sequence that leads to
damage or injury.
Heinrich places most of the blame for accidents
on human behavior.
Haddon concentrates on the physical
engineering aspects of the conditions that give
rise to accidents.
9-31

Approaches to Loss Prevention and Control

Some loss prevention efforts are aimed at
mechanical and environmental factors, and
seek to eliminate hazards.
These are referred to as the "engineering
approach."
Other loss prevention measures focus on the
individual, and seek to modify human behavior.
This is the "human behavior approach."
9-32

Engineering Approach
The engineering approach to loss prevention
and control emphasizes the elimination of
unsafe physical conditions by such measures
as fire resistive construction, burglary resistant
safes, boiler inspections, and safer cars.

9-33

Human Behavior Approach

The human behavior approach stresses safety
education and the motivation of persons.
Proponents of this approach to loss
prevention argue that most accidents are
committed by unsafe acts, and that the
greatest gains in safety and loss prevention
can be achieved through efforts aimed at
modifying human behavior.

9-34

Human Behavior Approach

The efforts aimed at modifying human behavior
include Education and Enforcement.
Education.

The first ingredient in the human

behavior approach to risk control
is education; making people
aware of the benefits of safety.

Enforcement.

For some reason, some people

feel immune to injury from the
hazards they face and must be
compelled to follow safety rules.
9-35

Control Measures and Time of Application

Another way by which loss control measures
can also be classed is according to the time at
which they are applied.
Haddon suggests that loss prevention efforts
can be classified as
pre-event actions
simultaneous-with-event actions
post-event actions
9-36

Control Measures and Mechanism

Another classification focuses on whether the
loss control measure is aimed at
the person,
the mechanical device or mechanism, or
the environment within which the accident
occurs.

9-37

Figure 9.3
Timing and Targets of Control Measures
Prior to
Event

At Time
of Event

After
Event

Individual
Machinery
Environment
9-38

Specialized Loss Control Techniques

Separation of Assets

Salvage

Rehabilitation

Redundancy

Noninsurance Transfers

9-39

Systems Safety
The initial stimulus for systems safety was the
creation of the intercontinental ballistic
missile (ICBM) system during the cold war.
Systems safety developed further in the U.S.
space exploration program.

9-40

Systems Safety Methods

Because the problems that it addressed were
complex, the common-sense logic approach
was supported by mathematical tools that are
common to engineering projects.
Systems safety is not a single methodology,
but a variety of different techniques designed
to analyze systems and identify potential
system failures.

9-41

Differences from Traditional Safety Approach

A first distinction between systems safety and
the traditional approaches to safety is in
emphasis in systems safety on identifying
losses that have not yet occurred.
Systems safety attempts to identify potential
failures before they occur so that measures
can be taken to prevent their occurrence.

9-42

Differences from Traditional Safety Approach

A second difference in systems safety was its
abiding faith in the principle of causality.
Systems safety rejects the notion that accidents
are a matter of chance and simply happen.
Instead, accidents are viewed as inevitable when
preceded by a series of acts or omissions.
By abandoning the notion that accidents are
unavoidable attacks of fate, the scenario is
altered dramatically. It means that accidents can
be prevented.
9-43

Hazard Mode and Effect Analysis

Attempts to summarize not only the system
component whose failure could trigger a loss,
but the importance of the failure and the
measures that can prevent the failure.
HMEA analysis is generally summarized in
tabular form, as shown in Table 9.1.
The specific questions that are addressed in
HMEA analysis are indicated in the headings
in Table 9.1.
9-44

Hazard Mode and Effect Analysis

Hazard Mode

The undesirable event that could occur

or desirable event that could fail to
occur.

Hazard Mechanism

The hardware or software that could

cause failure.

Hazard Cause

Physical, chemical, or human reasons

failure could occur.

Hazard Effect

Immediate function result of the hazard

mechanism.

Hazard Severity

Ultimate impact of the malfuction.

9-45

Hazard Mode and Effect Analysis

Hazard Detection

The very first indication or observable

exhibition of a hazard mechanism.

Hazard Probability

A rough estimate of the malfuctions

likelihood.

Hazard Deterrents

Response to question Is it possible

to eliminate this hazard?

Hazard Prevention
Action

Action that, if implemented, would

control hazard.

Hazard Control
Resources

Dollar value of resources required to

implement preventive action.
9-46

Fault-Tree Analysis
Fault Tree Analysis (FTA) is a second
technique of systems safety, designed to
identify system faults by identifying the
causes of events.
It was invented in 1959 at Bell Laboratories to
address what developers of the USAF
Minuteman intercontinental ballistic missile
(ICBM) system felt was an excessive risk in
the system.
9-47

Fault-Tree Analysis
FTA is a usually performed by a graphic
diagram (called a fault tree) that traces the
relationships between all minor events that
could lead to a major undesired event.
A fault tree has two major elements: (1) logic
diagramming, which connects, by means of
and and or gates the sub-events that
contribute to the ultimate undesired event at the
top of the tree and (2) the sub-events
themselves.
9-48

Fault-Tree Analysis
The tree is progressively constructed downward
by repeating the question What must happen
for the event or sub-event to occur?
The necessity and sufficiency of each sub-event
in the causality of the following event is
indicated by the type of gate; and or or.
If more than one sub-event at a given level must
occur before the event above them will result,
an and gate is used.
9-49

Sever
Fingers With
Power Saw

and

Power
turning
blade

Finger in
blade
path

or

No blade
guard

Improper
guard
9-50

Sources of Assistance for Risk Control

There are numerous organizations in our
society dedicated to promoting safety and
loss prevention.
Many of the major advancements in risk
control have come directly from the efforts of
insurance companies, both individually and
collectively.

9-51

Insurers Loss Control Organizations

Factory Mutuals and the Industrial Risk Insurers
focus as much on loss prevention services for
their insureds as on indemnification for losses.
The National Fire Protection Association, which
was formed in 1896, grew out of the loss
prevention efforts of insurers.
Insurance companies created the Underwriters
Laboratory that investigates and tests electrical
materials and products to determine that fire
prevention and protection standards are met.
9-52

Insurers Loss Control Organizations

The Hartford Steam Boiler Inspection and
Insurance Company, organized in 1866,
originated boiler inspection services.
Underwriters Salvage Co. assists in loss
adjustments through reclamation,
reconditioning, and disposition of damaged
goods.
The insurance industry also works closely with
and supports the efforts of the National Safety
Council and similar public safety organizations.
9-53

Loss Control Services Insurers

In view of the historical emphasis of insurers
on loss prevention and control efforts, it is not
surprising that insurance companies remain
one of the most widely used sources of loss
prevention and control assistance.
Insurers conduct loss control activities both
for their own benefit and as a service to their
insureds.

9-54

Benefit to Insurers
The major benefit to the insurer is in making
accounts more profitable by reducing the
amount of losses.
An insurers loss control specialists can
sometimes devise ways to improve loss
experience to an extent that allows the insurer
to write an account that would otherwise be
unacceptable.

9-55

Insurer Loss Control Services

There are three general levels of loss control
services that are provided by insurers.
A physical survey, which serves primarily for
the collection of underwriting information.
Risk analysis and risk improvement , which
includes loss control recommendations.
Safety management programming represents
a full-service approach to safety assistance.

9-56

Other Risk Control Resources

The Legal Profession - Although it is not
common to think of lawyers as loss
prevention and control specialists, it is clear
that in the post-loss phase of liability loss
control, they are the major players.
Accountants - The accountant is a major loss
prevention and control specialist in the field
of employee crime.

9-57

Disaster Planning
The objective of a disaster control plan is to
allow those responsible for the enterprise
during an emergency to focus on the solution of
major problems.
To accomplish this objective, the disaster plan
establishes an emergency organization,
designed to perform specific tasks before,
during, and after a disaster.
The purpose of a disaster plan is to provide
management with a planned course of action to
guide it in disaster or emergency situations.
9-58

Disaster Planning
An initial step in developing the disaster plan is
to establish priorities that will be followed in
resolving conflicts in developing the plan.
This advance determination of priorities will
guarantee that appropriate attention is given to
the rankings, and that decisions regarding
priorities do not have to be made under the
confusion and pressures of an actual disaster.

9-59

Organization Disaster Priorities

The first priority will be to protect human life.
The second priority will be to prevent or
minimize personal injury.
The third priority will be to prevent and
minimize the potential damage to physical
assets.
The fourth priority will be to restore normal
operations as quickly as possible.
9-60